April 28 (Bloomberg) -- If Pfizer Inc. is successful in its
$98.7 billion takeover of London-based AstraZeneca Plc, there is
one big potential loser: the U.S. Treasury.

Under the proposed deal’s structure, the combined company
would be owned by a new U.K. parent. That doesn’t mean any of
New York-based Pfizer’s executives would need to move abroad:
Chief Executive Officer Ian Read has said the drugmaker would be
run from the U.S. It does mean, however, that Pfizer is joining
a wave of U.S. companies using mergers as ways to slash income
tax bills by shifting their head office overseas -- often on
paper only.

“This is basically an opportunity to go outside the U.S.
and still sell in the U.S. and strip the tax base,” said H.
David Rosenbloom, an attorney at Caplin & Drysdale in Washington
and director of the international tax program at New York
University’s school of law. “If we ever had a legislature in
the United States, we could do something about this, but I don’t
expect to live that long.”

U.S. law seeks to stop companies from avoiding income taxes
by simply ditching their home residence. Those rules only
prevent companies from getting the tax benefit of an overseas
merger if their existing shareholders still own 80 percent or
more of the company’s stock after the deal.

In Pfizer’s case, shareholders likely would own less than
that proportion of the new combined company.

Tax Benefits

By switching its parent company from the U.S. to the U.K.,
Pfizer could take advantage of a number of tax benefits. The
U.K. corporate tax rate is 21 percent -- next year dropping to
20 percent -- compared with 35 percent in the U.S. In addition,
the U.K. only taxes profits that companies say are earned within
the country.

So earnings attributed to subsidiaries in tax havens aren’t
then taxed when they are brought home. And the newest benefit:
the U.K. is phasing in a 10 percent tax rate on profits
attributed to U.K. patents, a big source of income for any
drugmaker.

“The way we’re structuring this is, it’s fully compliant
with the appropriate laws,” Pfizer CEO Read told analysts on a
call today. “It’s in my future responsibility to maximum return
to shareholders, and I don’t actually see that is a conflict of
with the interest of the U.S. government.”

Last year, Pfizer reported an effective tax rate of 27
percent.

More Inversions

The U.S. Congress tried to impose a moratorium on such
corporate moves overseas -- called inversions -- in 2002. Two
years later, it passed legislation designed to limit that
practice.

Nevertheless, since 2012, at least 15 large companies have
either moved or announced plans to move offshore, including
Chiquita Brands International Inc., the Charlotte, North
Carolina-based banana importer, and New York-based Omnicom Group
Inc., the largest U.S. advertising firm.

Congress has responded much more quietly to the current
wave of inversions than to those that occurred in 2001 and 2002.

President Barack Obama has proposed lowering the 80 percent
threshold to 50 percent. That plan has gone nowhere in Congress.
Instead, U.S. lawmakers have focused on international tax policy
changes as part of a broader -- and stalled -- effort to revamp
the entire tax code.

‘Comprehensive Reform’

“Actions like this demonstrate the urgency for tax
reform,” said Lindsey Held, a spokeswoman for Senate Finance
Committee Chairman Ron Wyden, an Oregon Democrat. “Now is the
time to undertake comprehensive reform to ensure our country
stays competitive on a global stage and continues to be the best
place for corporate investment.”

Senator Charles Grassley, an Iowa Republican who helped
write the 2004 law curtailing inversions, blamed the U.S. tax
code itself.

“This is another example of our anti-competitive tax
code’s pushing companies overseas,” he said in a statement
today. “Until we can reform our tax code so we have a more
globally competitive system, businesses will seek ways to limit
their taxes in the United States in favor of foreign tax
systems.”

‘Land Grab’

The inversion trend is particularly popular among
pharmaceutical companies, which account for six recent deals,
including Actavis Plc and Perrigo Co. Gregg Gilbert, a Bank of
America Corp. drug analyst, dubbed it a “tax rate land grab.”

U.S. companies avoid taxes by attributing profits to their
overseas operations. If they bring those profits back to the
U.S., they must pay taxes at the 35 percent corporate tax rate,
with a credit for foreign taxes already paid.

The foreign units of U.S. companies have stockpiled about
$2 trillion in profits on which they have paid no U.S. tax. Much
of that is recorded in tax havens like Bermuda and the Cayman
Islands that levy no corporate income tax, which helps to cut
their worldwide bills.

Pfizer has accumulated $69 billion of earnings in its
offshore units, untaxed by the U.S. That has led some analysts
to speculate that Pfizer would seek to use some of its cash to
buy foreign companies.

The company may not be able to tap into that pile to
finance the cash portion of the deal without subjecting the cash
to immediate U.S. corporate income tax.